Vilas Company is considering a capital investment of $190,000 in additional productive facilities. The new machinery is expected to have a useful life of 5 years with no salvage value. Depreciation is by the straight-line method. During the life of the investment, annual net income and net annual cash flows are expected to be $12,000 and $50,000, respectively. Vilas has a 12% cost of capital rate, which is the required rate of return on the investment.

a. Calculating the Cash Payback period:

Cash Payback period refers to the amount of time it would take for cash inflows to offset the initial outflow

Cash Payback period = Investment/ Annual inflow

Cash Payback period = 190,000 / 50,000

Cash Payback period = 3.8 years

b. Calculating the annual rate of return on the proposed capital expenditure:

Annual rate of return = Annual income / Average Assets

Annual rate of return = $12,000 / (($190,000 + 0) / 2)

Annual rate of return = $12,000 / $95,000

Annual rate of return = 0.126315789

Annual rate of return = 12.63%

c. Annual inflow is $50,000 for 5 years.

Net present value is the present value of inflows less investment

Present value of inflows = Annual inflow * (1 - (1 + i)^-n / i)

Present value of inflows = $50,000 * (1 - (1 + 12%)^-5 / 12%)

Present value of inflows = $180,238.81

Net Present Value = Present value of inflows - initial outflow

Net Present Value = 180,238.81 - 190,000

Net Present Value = -$‭9,761.19‬

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a. 3.8 years

b. 12.63%

c. -$‭9,761.19‬

Explanation:

a. Cash Payback period.

The amount of time it would take for cash inflows to offset the initial outflow (investment).

= Investment/ Annual inflow

= 190,000 / 50,000

= 3.8 years

b. Annual income / Average Assets

= 12,000 / ( (190,000 + 0) / 2)

= 12.63%

c. Annual inflow is $50,000 for 5 years. Net present value is the present value of inflows less investment

Present value of inflows = 50,000 * (1 - ( 1 + 12%)⁻⁵ / 12%)

= $180,238.81

Net Present Value = 180,238.81 - 190,000

= -$‭9,761.19‬

answer; test-retest;

answer; the coefficient of determination;